1. Unit 13 – Adjusting and Closing Entries

2. Previously… All adjustments were made on the work sheet. The ledger accounts have not yet been changed. (currently, are incorrect and do not reflect the adjustments made on the work sheet) Adjusting entries are used to record the adjustments in the ledger accounts.

3. Adjusting Entries Work sheet Journal form Post them to the ledger

4. General JournalPage 21 DateParticularsP.R.DebitCredit 20_ Jan.31 Supplies Expense Supplies To record supplies used in January. Insurance Expense Prepaid Insurance To record insurance for the month. Rent Expense Prepaid Rent To record rent for one month. Depreciation Expense – Equipment Acc. Depreciation – Equipment To record one month’s depreciation, declining-balance method. 100.00 60.00 1700.00 160.00 100.00 60.00 1700.00 160.00

5. General Ledger (Before Adjustments) Supplies Jan.31 1000 Prepaid Insurance Jan.31 720 Prepaid Rent Jan.31 5100 Equipment Jan.31 12000 Acc. Depreciation – Equipment Jan.31 2400 Supplies Expense Insurance Expense Rent Expense Depreciation Expense - Equipment

6. General Ledger (After Adjustments) Supplies Jan.31 1000 Balance 900 Jan. 31 100 Prepaid Insurance Jan.31 720 Balance 660 Jan. 31 60 Prepaid Rent Jan.31 5100 Balance 3400 Jan. 31 1700 Equipment Jan.31 12000 Acc. Depreciation – Equipment Jan.31 2400 31 160 Balance 2560 Supplies Expense Jan. 31 100 Insurance Expense Jan. 31 60 Rent Expense Jan.31 1700 Depreciation Expense - Equipment Jan. 31 160

7. Adjusting Entries Work sheet Journal form Post them to the ledger Adjusted Trial Balance

8. Closing Entries Summary – Income statement: net income or net loss for a specific accounting period. (data found in revenue and expense accounts) New accounting period = revenue and expense accounts should show zero balances. “Matching principle” – revenue for each accounting period is matched with the expenses for that accounting period to determine net income or loss. Closing the books: the process by which revenue and expense accounts are reduced to zero at the end of each accounting period.

9. Temporary (vs) Permanent Accounts Temporary accounts: – Contain information for the current accounting period only – Balances not carried over to next accounting period – Examples: Revenue & Expense accounts Permanent accounts: – Balances are carried forward from one accounting period to another (they are not closed – put to 0) – Examples: Asset, Liability, & Owner’s Equity accounts

10. Purpose of Closing the Books 1)Prepare Revenue and Expense accounts for the next accounting period (by reducing them to 0) 2) Updating the Owner’s Equity account - Increase or decrease of capital [Net income/loss, and Drawings]

11. Income Summary Account Closing Revenue & Expense accounts Income Summary Account Transfer balances Expenses Balance XXX XXX Revenue XXXXBalance XXXX Income Summary XXX Balance (net loss) XXXX Balance (net income)

12. Steps – Closing the Books 1)Close Revenue Accounts into Income summary 2)Close Expense Accounts into Income summary 3)Close Income summary into Capital 4)Close Drawings into Capital

13. Step 1: Close Revenue Accounts into Income summary Sales Dec. 31 20 000 General JournalPage DateParticularsP.R.DebitCredit 20_ Dec. 31Sales Income Summary To close the sales account. 20,000.00 Sales Dec. 31 20 000Balance 20 000 Income Summary Dec. 31 20 000

14. Step 2: Close Expense Accounts into Income summary Advertising Expense Dec. 31 3 000 General JournalPage DateParticularsP.R.DebitCredit 20_ Dec. 31Income Summary Advertising Expense To close Advertising Expense. 3,000.00 Advertising Expense Balance 3 000Dec. 31 3 000 Income Summary Dec. 31 3 000Dec. 31 20 000

15. Compound entry (makes it easier) General JournalPage DateParticularsP.R.DebitCredit 20_ Dec. 31Income Summary Advertising Expense Salaries Expense Telephone Expense General Expense To close the expense accounts. 14,000.00 3,000.00 10,000.00 500.00

16. Step 3: Close Income Summary into Capital Income Summary Dec. 31 14 000Dec. 31 20 000 Balance 6 000 General JournalPage DateParticularsP.R.DebitCredit 20_ Dec. 31Income Summary D. Adams, Capital To close Income Summary and transfer the net income to Capital. 6,000.00 Income Summary Dec. 31 14 000 31 6 000 Dec. 31 20 000 Balance 6 000 D. Adams, Capital 17 000 Dec. 31 6 000 Net income Credits > Debits Increases OE

17. Step 4: Close Drawings into Capital D. Adams, Drawings Balance 2 000 General JournalPage DateParticularsP.R.DebitCredit 20_ Dec. 31 D. Adams, Capital D. Adams, Drawings To close the Drawings account. 2,000.00 D. Adams, Capital Dec. 31 2 000 ________________ 17 000 Dec. 31 6 000 Balance 21 000 D. Adams, Drawings Balance 2 000Dec. 31 2 000

18. Closing Books (from work sheet) Same process. – (simply retrieving information from the work sheet) – Example: Page 244-248 – See Ledger Accounts (after adjusting and closing entries have been posted) – Page 246-248

19. Post-Closing Trial Balance Created after adjusting and closing entries have been posted to the general ledger. Purpose: prove mathematical accuracy of the general ledger. (debits = credits) … ready for the next fiscal period. This trial balance is much shorter. – Only asset, liability, & capital accounts have balances. (others have been closed)

20. Post-Closing Trial Balance Management Consultant Services Post-Closing Trial Balance December 31, 20 - AccountAcc. #DebitCredit Cash Accounts Receivable Supplies Equipment Accumulated Depreciation – Equipment Accounts payable Bank Loan J. Turner, Capital 100 102 131 141 142 200 221 300 $ 18 000 19 000 1 400 12 000 _________ $50 400 $4 320 1 000 3 000 42 080 $50 400 Example 249-250 (Effect of a net loss) …Decreases Owner’s Equity.

21. Updated Accounting Cycle Business Transactions Journal Ledger Journalizing Posting Work sheet including Trial Balance Prepared Work Sheet Financial Statements Prepared Financial Statements Journal Adjusting and closing entries journalized Ledger Adjusting and closing entries posted Post-closing Trial Balance Proof New Accounting Period Begins